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Tuesday, January 15, 2013

Major top coming together

I made the call last Aug. that we were about to make a major top.  That was based on several things, but there were some ingredients missing at that point.  I was a bit nervous about that, but the indexes were clearly acting right for a top.  One of those ingredients was a margin debt surge.  That started happening in Sept. and continued through Nov. which is the latest month we have data for.  I would not be surprised to see that it continued higher in Dec. We can check the margin debt check box for a top now as it is well above $300 billion.
Another ingredient missing was the real bullish sentiment.  That missing piece started changing last fall also.  I have shown the Bespoke poll a  number of times.  It still amazes me.  Here is the latest to refresh your memory.


I think that chart speaks for itself very clearly if you have any contrarian inclinations, LOL.  The other sentiment items I have posted recently also show a lot of bullishness.  If that was not enough to check off the overly bullish sentiment check box for a top, check out the fund flows.

There was a big surge into equity mutual funds the first week of the year.  There are different groups that put out numbers for this data and that leads to some differences.  However, by all accounts we set multi year highs for inflows.  Lets look at some charts.


We have to go all the way back to the spring of 2000 to find long only (LO) equity mutual fund inflows that big.  That was when the NASDAQ and SPX indexes topped.  Here is another look.

The number from EFSF/Lipper was $22 billion.  They say it was the second biggest week of inflows in their data.  Here is a chart of SPX marked with the date of the biggest inflow.


Apparently the biggest inflow was right at the 2007 top.  Clearly the tag line used by so many that everybody is bearish no longer applies.  We can check off that overly bullish sentiment box as well.  Everything is clearly in place now.  All that is left is for price to confirm.

Keep in mind that all this money poured in this year after the big gap up.  It won't take much of a pullback to put them all underwater.  Here is something to think about.  We had huge inflows, but the futures only tacked on about 19 points to the intraday high (+1.3%) since the 1/2 open.  That is nine trading days.  That is not even a big one day total.  In an eight day span during the big inflow in March of 2000, SPX went from 1359 to an intraday high of 1552 (+14%).  Somebody has to be taking money out of this market.  Is it possible smart money is selling into the frenzy?  I guess we will find out in the weeks and months ahead.


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